But now I've discovered THE EXCEPTION. It has to do with the new "saver's credit" enacted with the Economic Growth and Tax Relief Reconciliation Act of 2001 that becomes available in 2002. The credit can be worth as much as$1,000 per year to taxpayers who invest in retirement accounts and have incomes below certain limits.The taxpayer must be at least 18 years old and cannot be claimed as a dependent on another taxpayer's return.

Plus there is one additional requirement - the taxpayer cannot be a full-time student.

I don't get it. Why discriminate against full-time students? Shouldn't they be encouraged to save for retirement just like any other adult who might benefit under this provision? Should my child be cutting back on the number of classes she signs up for under the excuse of tax planning? The IRS in Announcement 2001-106 says that a student is a full-time student if he or she is enrolled for the number of hours or courses the school considers to be full-time, in some part of each of five months during the calendar year.

If you are wondering exactly how this credit works, I will apologize for not going into all the details here. Generally speaking, if your adjusted gross income is $50,000 or less, you can claim a nonrefundable credit against your 2002 and future years' federal income tax for up to 50% of the first $2,000 you contribute to a 401(k), 403(b), IRA, or a few other retirement savings vehicles. The credit percentage varies based on your filing status and income breakpoints below $50,000. The IRS provides an example of a couple earning a combined $34,000 who save $2,600 in federal tax simply by making $4,000 in contributions to their own IRA and 401(k) accounts. That is a truly incredible result and a powerful incentive for eligible taxpayers.

(The credit is nonrefundable, but it can be applied against alternativeminimum tax. It may not provide full benefit to taxpayers who will use other nonrefundable credits, such as the Hope credit, to reduce tax liability to a low level.)

So I'm sorry to say that there may be one more thing to think about in your tax planning as you send your child (or yourself) off to college next year. Full-time or part-time? Of course, most of us are so confused by all these competing tax incentives that we simply go about our normal business, and hope some tax breaks roll our way when we file our returns on April 15.

As an added note:
A reminder for those of you who purchased EE savings bonds or I-Bonds in prior years hoping to take advantage of the education exclusion for interest on qualified bonds redeemed to pay college tuition and fees. In addition to all the other requirements that must be met in order to take advantage of the exclusion, your adjusted gross income must be below certain levels in the year of redemption. If your AGI meets the requirements this year ($55,750 for singles and $83,650 for joint filers and surviving spouses), but your child is not yet in college, you may wish to consider rolling over your bonds to a 529 plan before the end of the year. Because qualified 529 withdrawals are exempt from federal tax beginning in 2002,this could allow you to lock in tax-free interest on your bonds in the event your income increases to the point during the college years where you no longer meet the requirements for bond interest exclusion. Make sure you understand all the requirements, and consider the investment aspects as well. Visit www.savingsbonds.gov.

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